Thursday, October 19, 2006

Thoughts on Video Distribution and Google/Youtube

Despite the disruptive and quasi-anarchic nature of Youtube, it’s ironic that the distribution system for Google/Youtube has ended up resembling that of traditional cable television, in as much as it is an integrated content aggregation and delivery system. On the internet, integrated systems seem to work well only in the early phases of technology adoption.

In the late nineties, as internet adoption went through its first growth phase, AOL was also very successful in offering an integrated content aggregation and delivery system for the ‘text-internet’. In the same way, these early days of internet video mass adoption call for an integrated solution like Youtube, which hosts, delivers and controls content. But, as the business model and infrastructure of online video matures, and consumers and media providers find easier ways to create, consume, monetize and interact with online video content, there will be a natural shift to a more distributed / and dis-integrated system with content residing on multiple web sites and intermediaries.

The question then, will be: As online video enters this new phase, will Youtube/Google follow AOL’s path and let its centralized structure and dominance derail it, or will it leverage its current dominance to do to video what it already did to the text-internet and to the AOL of old.

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Some diagrams and verbiage to expand on these thoughts:

Below is a diagram showing traditional video distribution, controlled by the cable and satellite players. Companies like Comcast act as integrated content aggregators and distributors. They do deals with institutional content providers – that is the hundreds of channels like CNN and ‘Comedy Central’ – to get access to content and then distribute that content to consumers. In doing so, they host the content on their servers and distribute it through their infrastructure, and they even help monetize that content by charging fees and to some extent via advertising. (Though, it is noteworthy that the content creators are generally responsible for doing advertising deals in this model.)

Compared to cable, Youtube clearly represents some major changes in video distribution – the obvious example being that the Youtube model has allowed thousands of individuals to distribute their content. But in other ways (as seen below), Youtube still acts as an integrated aggregator: It controls the content on its own servers – talk about a real ‘walled garden’ - it distributes the content, monetizes it with advertising, and now, following the recent deals, it is paying fees and royalties to the institutional content creators. In a way, this model is even more integrated than traditional cable distribution, in that Youtube has wrested some control over the advertising from the content creators, and has integrated this critical part of the value chain. (Though, at the end of the day, nothing will stop large content providers from flexing their advertising muscles on Youtube content, dictating, for example, that any clips of American Idol on Youtube can only have Coca Cola ads around it. That creative tension should be fun to watch over the next couple of years.)

Now, let’s compare Youtube/Google to the AOL of the late nineties. When the internet was entering its first growth phase of mass adoption, it made sense for a company like AOL to take a leadership position and become a centralized and integrated hub, intermediating between content owners and consumers – doing deals with the former and providing a centrally controlled, easy-to-use, walled garden to the latter. There was a lot of value in this integrated intermediary role. Content providers had not figured out how to deal with the web. The consumers were new to the web and preferred to be spoon-fed, and the infrastructure of the web was not sophisticated enough to allow for an idiot-proof user friendly experience compared to what AOL’s integrated approach could provide.

Over time, the web dis-integrated AOL’s services, and redistributed them among multiple specialized players. Obviously, one of the most symbolic beneficiaries of this shift was Google. Google provided an easy way for people to find content in a distributed world, and to be found, via advertising - critical services for a distributed environment. AOL tried providing these same basic services in a closed or integrated manner, leveraging and retaining its dominant intermediary position between content and consumers. But ultimately, the power of an open, standards based dis-integrated environment was too powerful, and as the web matured, the ultimate winners were those, like Google, who empowered the players in that distributed environment.

In the video world, Google/Youtube delivers its video technology and content as an integrated system. Even if Youtube’s innovative strategy of allowing embedded videos has the feeling of being distributed, ultimately, its core model is integrated – it still controls the hosting, distribution and monetization of the content.

As video technology, infrastructure and business models mature, there will be less of a need for an integrated solution such as Youtube. As with the text-web’s transition from AOL’s walled garden, video content will inevitably dis-integrate and the value will shift to more specialized players. The beneficiaries of this shift will be the various service providers and technology providers which enable and facilitate the distributed/ disintegrated model. One could argue that Brightcove is playing to be a key technology enabler in this world. Many new players are vying to create services such as ad insertion. And my own evoketv was supposed to be positioned to be the search / guide for this new world.

This does not mean that “Youtube was a bad acquisition” – quite the contrary: the Youtube deal shows Google’s incredible self-awareness regarding its strengths and weaknesses. What other company has overcome NIH with such panache?

It just means that, when / if the video delivery chain starts to disintegrate, Google should be ready to participate within the new structure, and open its services up at the right time, and in the right way. My bet would be that Google totally gets this and that they will not try to keep its video services integrated for ever. But then again, it’s always tough to open up and disrupt yourself when you are sitting in a lucrative intermediary position.